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"If The Fed Was Truly Data-Dependent, They Would Have Tightened Already"
Via Scotiabank's Guy Haselmann,
Moving the Goal Posts
If the Fed were truly ‘data dependent’ they would have tightened already. Yet, it has been difficult to react to this fact, because of the FOMC’s recent history of fluctuating policy objectives and shifting interpretations as to how best to achieve its dual mandate. Simply stated, the goal posts and communication around them keep moving.
In 2006, Bernanke said that “stable prices are a prerequisite to the achievement of the Federal Reserve’s other mandated objectives….” In other words, achieving maximum employment and low long-term interest rates, required price stability foremost. However, in the past few years, the FOMC expressed its willingness to compromise price stability in order to gain improved employment. It seems to me that markets have been duped into believing that inflation is a proxy for growth.
The Fed even went so far as to explicitly state, “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic condition may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run”. This declaration was euphoric for risk assets and music to the ears of speculators.
It further served to turbo-charge already rampant moral hazard. It now appears that any unanticipated outcome or another deviation could trigger an unwelcomed unwind of those exposures, damaging (further) the Fed’s long-run credibility.
Was the Fed forced to delicately shift focus because stable inflation was inconsistent with the aggressive scaremongering they were doing about deflationary fears? After all, the PCE deflator tracking around 1.5% (not falling) and seemed ‘close enough’ to the Fed’s 2% target. Were exaggerated fears of deflation merely a smokescreen to justify risky and politicized policies? We may never know, but it is possible that the Fed’s experimental actions might be worse than the deflation risk itself.
Charles Calomiris of Columbia University stated in his paper Phony Deflation Worries, “There is no obvious directional connection between disinflation or deflation today and changes in real economic activity tomorrow”. He goes on to say that “The right way to frame the question of deflation risk is to identify the circumstances under which deflation outcomes propagate adverse economic shocks, leading to further decline in economic activity”.
The paper goes on to explain the reasons why the Fed fears about deflation are unfounded. He concluded that three necessary conditions must be satisfied in order for a potential deflation to be associated with adverse change in economic activity:
1) it (deflation) must come as a surprise;
2) it must be sufficiently large and persistent, and;
3) it must reflect a negative aggregate-demand shock.
In other words (and I paraphrase Calomiris) if the deflation was caused by improvements in technology, then this would be good, because it would not be associated with a reduction in the debtors’ net worth, and therefore, will not be a source of financial distress or reduced spending by debtors.
These conditions clearly have not existed, particularly in the past few years under QE3 and extended ZIRP. Ironically, the reengineered focus on labor markets also seems to have been a smokescreen and has now also become ‘close enough’ to its employment mandate. Measuring slack is imprecise at best. A downward trending 5.9% unemployment rate is not far from what is considered to be NAIRU. The Fed appears to be behind the curve with economic facts not supporting the Fed’s data dependency dialog.
So, where does this leave the Fed? As I said on October 23, “sooner but slower” seems more practical to me than “longer for longer”. Should it move soon (March latest), maybe it can even regain some credibility. Fisher said in his speech on Tuesday that “monetary policy is like bagging a Mallard, you aim where the bird is going, not where it has been” (due to its lag effects).
Since investors have chased the same one-way bet for many years, encouraged along by the Fed - and since they remain confused by the Fed’s fluctuating message – I suspect the market’s reaction to an approaching hike in rates is likely to be problematic and have characteristics that resemble the flash crash observed last month.
The Fed is unlikely to be swayed by challenges facing Asia, Europe, Emerging countries or the Middle East, because most of the countries in those areas are taking actions to confront their own domestic issues.
However, fragmented global policy shifts - as opposed to the quasi-coordination from 2008-2013 - are causing enormous volatility in currency and commodities. It is likely to spill over into equity and bond markets, and have the potential to trigger disruptive second order effects. Hopefully, the Fed does not miss its window of opportunity to hike before this occurs.
“Beware of the naked man who offers you his shirt” – Navjot Singh Sidhu
Markets
I remain a bond bull. The long end of Treasury market will stay well bid as demand will continue to outweigh supply. The Fed is voluntarily hoarding 45% of all issuance longer than 10 years. Primary dealers have a regulatory-mandated need to hoard Treasuries due to the new liquid coverage ratio (LCR), as well as a shortage of high-quality collateral. PBGC rule changes also encourage LDI long duration Treasury demand for private DB pension plans. I believe the 30-year will continue to march to lower yields.
On the other hand, the front end is still not priced properly for a Fed that may move “sooner”. As I’ve been saying in recent weeks, there will be periods prior to economic releases when flattening trades will be preferred. Negative carry makes it too difficult to hold then over time.
In April, I was calling for the 5’s 30’s curve to trade under 140 basis points before the end of the year (142 today). I expect it to trade under 100 bps in early 2015.
In addition, taking a short position in April Fed Funds futures (FFV5) seems to have an excellent risk/reward profile, strong optionality and a binary profile.
“You don’t need a weatherman to know which way the wind blows” – Bob Dylan
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Yes, they would have in fact begun tightening in the 90's.
Stupid fucking sheep.
But... The Fed IS tightening... [it's @ss sphinchters ~ that is]
The FED are a rabble of jawboning bankster lackey's.
Their goal is to: crush the middle class, impoverish retirees, punish savers, lower employment and income, while enriching the Elites of Wall Street.
If they had a scintilla of honesty in 2008 they would have: left the prime rate at 8%, not supported the bailouts, not done QE, and gotten the hell out of the way.
@ crossbones. I wish I could have said that first. Right on. Even if they stopped at 4% would have acceptable.
But this free money to the banksters like Goldman is a crime in the works. Just why did Goldman become a Bank. Hmmmm.
And who did it, the X CEO of Goldman, Hank Paulson, under the engineering of Neel Kaskari. All from Goldman.
And where is Neel. Trying to be a politician in California. The giant squid has big and many sucking tenacles.
Or even 6% for fucks sake.
Every justification the fed makes is a lie. Analyzing what they say is a waste of time. Also, seeing a banker quote dylan is horrendous.
What a load of crap. The fed can't and they won't meanigfully tighten. What are they going to do? Invert the yield curve and blow up the derivative markets again? Fuck no and what's left of this pathetic market knows it. That's why we see the ten year yielding 2.23%.
Slow down brother....They don't have all your money yet!
If you tighten to much....I'll have to pull out
No they won't tighten a noose around their neck. Something more powerful will have to do that.
A JPM managing director is now ' hired ' to work at Treasury overseeing public pension funds . Remain calm, citizen !
Let's wind down that Fed. balance sheet. I see no positive impetus from either party, regarding that matter?
What makes this charade so obvious, is the fact that interest rates will SPIKE, and the USD will fall if that happens.This is what the Fed. wants! The usd will get slammed when rates move higher! Everything for the last 6-7 years has been equity valuation based.
(complete opposite of Japan)
People should listen more to "Bay of Pigs" ( He discusses the breakdown of U.S. bond ownership, all the time.)
The Fed. reached the limit of what was acceptable for direct ownership, and has employed foreign sovereigns and banks to take -up the slack.
YC. Beg to differ. If rates rise the FED is selling bonds into the market and taking money out. They might try to talk this talk without actually conducting it, but eventually in order for the desire to stick they have to sell bonds and you will see a corresponding rise in yields (rates). this has the effect of bolstering the $USD not debasing it. Debasing it arrives from continued bond purchases. Unless I am missing something.......
I said NOTHING about the Fed. raising rates. The by-product of every Fed. reduction/tightening (since 2007) has been higher rates, and a lower $usd valuation vs DXY.
The yen, euro, pound-sterling aren't reserve currencies. We're slowly watching the yen be displaced as an "safe haven" currency.
Look at the current level of eur/chf. Is the SNB prepared to defend the 1.2000 eur/chf peg?
The fed want's rates raised by "external measures". (indirect) That doesn't require a change in Fed. monetary policy, and the Fed. can lie and say there's demand, ala proxy offshore demand.
( Belgium) I'm guessing the Fed. has moved on from Belgium to another "host" though.
YC you've probably moved on from here, but, still not following. Rate spikes, if not FED induced, say instead the Bond market gets skiddish, then I agree, the FED has to print to suppress yields (rates), bond prices rises and the $USD tanks. I agree. Rates raised by external measures occurs only if internationals dump treasuries forcing the FED to mop them up, thus suppressing yields from rising and bond prices will necessarily rise, and $USD tanks. - which hey, that could happen too. To me, whether it is outside induced or domestically - seems the jig ends up the same no? and i still don't understand how a FED reduction/tightening (since 2007) has led to higher rates and a lower $USD valuation against DXY. It has been the FED suppressing rates, by buying the short end selling the long end (twist), then just outright buying of MBS and all sorts of other crap in addition to bonds to keep rates suppressed that has tanked the $USD against the DXY, not higher rates. Higher rates implies a return (at least directionally) to sound money. what you are saying suggests a movement the other way. Anyhow, lastly, I always thought of the Yen as a carry rather than a safe haven, unless by "safe haven" you mean, "safe carry". he he.
I agree completely, its the best grapefruit in the dump theorem, and the US is that grapefruit. The biggest threat to that scenario is a further escalation in the currency war. If the ECB is super dovish tomorrow, and I dont think it will the euro moves towards parity, and the yen rises...... US Stocks should dump, (not sure they will)... At some point its check to the US to print more.... then the dollar drops. Other than that the reserve currency will only get stronger, in parallel with rising bond prices....
The USD is already back to pre-crisis highs.(2007) Look at what happened shortly afterwards. The usd massively "sold off" as the Fed. liquidated/printed everyone.
Do you have a trading platform with realtime usdx? If NOT I'll provide you with a link.
And if my Aunt had balls she would be my Uncle.
Let me ask you one question
Is your money that good
Will it buy you forgiveness
Do you think that it could
I think you will find
When your death takes its toll
All the money you made
Will never buy back your soul...
Bob Dylan
Only a 'No one could have seen it coming' event is going to throttle the Guy Haselmann types. Hard to believe his memory is that short and the seductive 'convincing' of QE has taken him this easy.
We'll all be dead and turned to dust long before the Fed ever tightens anything but their sphincters.
Dear Guy Haselmann: You are an asshole.
The Federal Reserve is managing a FRAUD, aka fiat money.
The best way to improve the economy is to terminate the Federal Reserve and bring you, all the Federal Reserve officials and all bankers to justice.
May you rot in hell!
All the Fed cares about is ensuring that credit/debt keep rising to give some GDP growth and the appearance that all is well. Unfortunately, the collapse of this latest central bank created credit bubble will end as badly, if not worse, than the last ones. This much is certain, it is just a matter of time.
As a Midwesterner, I must be misunderstanding Janet's Brooklyn accent, as I thought she said the Fed was "beta dependent", which made more sense, sending Jimmy B out every time the Dow moves up or down a certain % to either brandish the QE bayonet, or permanently re-retire it to the Fed museum, depending on which side of 17,000 we fall that week.
If the Fed were truly data dependent they would use a look-back method and determine policy from what has already happened
instead of basing policy on imaginary projections of what they imagine will happen.... (assuming anything in economics can
be valid and that economics as embodied by the Fed and their captured economists on staff is anything more than ruling
class disinformation and propaganda - which is a stretch.)
artificialy suppressed rates ignore that interest rates are supposed to reflect risk, time value of money and some profit to the lender.
by any measure suppressed rates at the levels since 2001 mean we have been in deflation since then. (regardless of the lies the "overlords" swamp the sheep with)
taking into account any small amount of inflation real rates have been negative for 12 years
Deflation, conflated with inflation is confusing, however regardless of of the noise of inflation surrounding it
deflation is simply negative growth, negative real interest rates, shrinking employment, lenders with no motivation to lend
for returns which misprice (underprice) risk.
Deflation ultimately implodes. Low rates to try to keep national debt interest "in control" leads to deflationary implosion of an economy.
There is nothing better for a government than ample tax revenues which is impossible in a shrinking economy controlled by special
interests with a myopic view that they are serving their own interests while in fact undermining everyone's interests and their own
by collapsing an economy.
I thought everyone knows the Fed is Wall Street-dependent